Dealpolitik: Nasdaq Flopped. Let the Blame Game Begin..
Nasdaq OMX didn’t just lose in its negotiations with the Department of Justice. It was an ugly shutout. Now, the real game begins: assigning blame.
You didn’t need to be a rocket scientist to predict that the deal would have antitrust difficulties. A merger of the only two major exchanges in the U.S. sounds anticompetitive. And the DOJ outlined three other related markets which a NYSE/Nasdaq combination would have cornered if the deal had gone through.
Moreover, the argument that somehow the merger was necessary to keep the U.S. competitive as it loses listings to offshore exchanges always struck me as make-weight. The companies who list overseas don’t go there because there is something deficient with the competitiveness of NYSE or Nasdaq. Foreign companies need to list where their potential investors are. NYSE and even Nasdaq are still the gold standard for prestige, but foreign companies can balk at a U.S> listing because of our disclosure requirements or our litigation system. Combining Nasdaq and NYSE wouldn’t solve that.
Ok, so did the lawyers blow it? I doubt it.
Here is how a deal like this works: The antitrust lawyers would have been among the first advisers brought into the deal. Nasdaq and ICE each had top-flight lawyers in their camp seasoned in the ways of the DOJ. Undoubtedly they threw up the caution flag almost immediately. Nevertheless, those lawyers would have brought in economists to help spin the deal as pro-competitive. The team certainly developed some arguments to use with the DOJ, but I would be shocked if they did not warn that Nasdaq could lose the antitrust argument.
It is equally obvious that the lawyers and economists didn’t say a takeover was hopeless. With hindsight, perhaps they should have pushed back harder, but when arguing with the government, very few matters are utterly hopeless. The lawyers were probably promised political help with the flag waving arguments about making the U.S. more competitive, and help from Capitol Hill to keep Germans from controlling our flagship stock market.
It appears that those arguments ultimately fell flat on their face once Congress realized how much blood-letting would be involved in Nasdaq’s integration of the NYSE employees. But that is not the antitrust lawyers’ fault.
European Pressphoto AgencyWith the potential legal arguments and a promise of political pressure, the deal probably got a bright orange caution light. One where with enough spackle—divestiture of certain businesses and undertakings to limit anti-competitive behavior—antitrust holes could be filled to the ultimate satisfaction of the DOJ.
The gambit obviously didn’t work. Nasdaq spent $5 million on the proposal before its announcement of the NYSE takeover offer on April 1, so probably will now have a charge in the tens of millions of dollars, particularly if it actually paid for the bank financing commitments Nasdaq said it had.
And the costs could have been much, much higher. If NYSE actually had agreed to the rival deal, Nasdaq now might be out $700 million. Half of the payments in Nasdaq’s proposed agreement was to reimburse NYSE for its breakup fee owed to Deutsche Börse, and the other half for the reverse breakup fee of $350 million Nasdaq offered. That just proves there is always a way to fall on your face even harder.
The spiked takeover offer is a giant black eye for Nasdaq. But lawyers don’t tell clients what to do unless it is clear they are violating the law. Lawyers tell clients what the law is and how they propose to argue the case. This debacle falls directly at the feet of Nasdaq management and the board.
But there is a silver lining for Nasdaq in this otherwise dark cloud.
The worldwide consolidation of securities exchanges is not over. Indeed, the combined NYSE and Deutsche Börse have the balance sheet power to make further acquisitions. And it is not inconceivable that Nasdaq was in their sights.
By making its proposal, Nasdaq has largely inoculated itself from a future hostile bid by NYSE/DB. After NYSE’s weeks of railing about the antitrust perils of the Nasdaq-NYSE combination, it will be very hard for NYSE in the near future to flip flop and argue it should be allowed to swallow Nasdaq.
And given that Nasdaq has so far been left out in the cold in this wave of consolidations, that fact alone may prove to be particularly valuable to Nasdaq as it continues on its lonely way.
(Note: the author owns shares in Nasdaq OMX and NYSE Euronext.)
AI
